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Reserve's nightmare turns it into the little Aussie battler

It's an Aussie battler's worst nightmare. You've got a smacking big loan with the bank but the value of the family home is falling. Times are tough. You're veering towards the dreaded "negative equity" territory, being under water on your mortgage that is, or owing more to the bank than your home is actually worth.

It's an Aussie battler's worst nightmare. You've got a smacking big loan with the bank but the value of the family home is falling. Times are tough. You're veering towards the dreaded "negative equity" territory, being under water on your mortgage that is, or owing more to the bank than your home is actually worth.

As it turns out the Reserve Bank of Australia is having a "negative equity" nightmare of its own. Just a 3 per cent fall in the value of its assets and the RBA is under water. Good thing the RBA has a sugar daddy, Joe Hockey.

To explain, Treasurer Wayne Swan blithely snipped a $500 million dividend from the Reserve Bank's wilting cash reserves last year. The bank had just made its first profit in three years and the government commandeered almost half of it. It had to make the budget look good somehow. Governments do this from time to time. Since the central bank was formed in the 1960s though, the money has never flowed the other way; from the government into the RBA.

That may change. Shadow treasurer Hockey plans to top up the Reserve Bank's emergency capital "buffer" to the tune of $4 billion.

Even before the Treasurer took his $500 million dividend the RBA's cash reserves were under big pressure. The rising $A had cut $5 billion from its capital base in 2009 and 2010. As the local currency rallied against its peers, the value of all its foreign currency assets fell. Now its "reserve fund" or capital buffer hovers at just $1.95 billion.

Another rise in the $A, and Australia's central bank could find itself in "negative equity".

To deploy the analogy of the Aussie battler, this is akin to a fall in the value of the family home to just above the value of their loan from the bank. We are talking here about a battler with a 3 per cent deposit and a home loan worth 97 per cent of the home. That is where the Reserve Bank stands today.

According to its own data, the Reserve Bank's gold and foreign exchange assets dropped $4.6 billion in value during the week to April 3 alone as the $A rose and the price of gold fell.

These are volatile assets, especially as there is a global currency war raging. Europe, the US and Japan are all belligerently inflating their way out of trouble, debasing the value of their currencies to lend themselves an edge over their trading partners.

For Australia's banks, the RBA is the lender of last resort. It has even set up a $380 billion bailout fund called the Committed Liquidity Facility (CLF) which the banks can tap if they get into strife.

Ironically, the RBA has said it will give banks access to the fund if they are insolvent and illiquid, but not if they are in "negative equity". That is, if their assets are worth less than their liabilities.

Under these rules, the RBA would not qualify for its own bailout money if its currency and gold assets fall another 3 per cent.

Hence Hockey's proposal for a $4 billion cash infusion. For Hockey it simultaneously embarrasses Swan while potentially delivering him the stupendous title of the Man Who Saved the Reserve Bank.

But if the RBA is the lender of last resort for the banks, the taxpayer is the lender of last resort for the RBA.

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